Stealth Correction Over?
While some market observers fret about the dreaded Death Cross on the Dow that occurred last week, the signs of trouble under the surface have been brewing since June. I am talking about multiple measures of market breadth, all which track in different ways the percentage of stocks participating in the advance to new highs. Many of these breath measures have foretold of a "stealth" correction in stocks.
Here is the percent of S&P 500 stocks trading above their 200-day moving average...
Note that in June as the S&P 500 continued to flirt with new highs near 2130, a large chunk of the market started to roll over. This is evidenced by the percentage of stocks above their 200-day giving up the 65-70% "strong bull market" support zone and slipping under 50% in July.
The "glass half-full" view is that there appears to be some stabilizing going on here and Monday's close at 58% is the highest since July 20. It's also worth noting that this weak breadth is driven primarily by two sectors, energy and materials, both of which have been impacted by the strong dollar and weak commodity prices.
Another great way of looking at market breadth is the S&P 500 Equal-Weight index, which strips out the muscle of the mega-caps like Apple (AAPL) and Google (GOOGL). This version of the index has spent most of July and August struggling with its 200-day moving average...
This way of looking at the S&P 500 also shows that market breadth started to roll over in June, even as the headline index was trying topush for new highs all summer.
But there are signs of life here too, as the Equal-Weight index puts in higher lows in August and also notches its highest close since July 20.
Note that the congruence here with the percentage of stocks above their 200-day is expected. The precision mirroring is not. And July 20 was also the last peak for the conventional S&P 500 index and this means that market breadth is making a comeback while the index stabilizes around 2,100.
Bigger Correction Yet to Come?
Finally, another congruent breadth measure is the number of S&P stocks in their own corrections. In early August, over 55% of S&P stockswere more than 10% off of their 52-week highs. Is this a warning sign for more pain to come for the entire market?
Recently, Urban Carmel of The Fat Pitch blog tackled this question..."Does poor breadth lead inevitably to a major market correction? The answer is no." Going back to 1993, he looked at instances where half the S&P traded 10% from their 52-week high while the index was near a high. "This occurred near two tops (2000 and 2007) and near a 10% correction (2012) but also in the middle of several uptrends (1993, 1999 and
2006)."
His conclusion: "There could be a correction now, in 6 months or years later. The signal to noise ratio is weak, probably because gross measures of breadth do not distinguish which or how many sectors are weak."
My conclusion: We may have just had an "internal" correction that is now over. The volatile reaction we saw last week to China's surprise yuan devaluation has all been recovered.
And my sense is that if this moderate economic shock could only send a struggling market down a scant 2% -- most of which was recovered on the same day following last Wednesday morning's plunge -- then the market is not really as weak as it looked under the hood. In other words, most of the selling has been done already and eager bargain hunters looking ahead to decent fundamentals in the second half only wish there had been more time to buy.
This doesn't mean we won't continue to go sideways for another month until the big September Fed meeting. But liftoff or "flight delay" for interest rates, it looks like the stock market still wants higher.
Posted by: sarah_oz@yahoo.com
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